In re Kearney

• Decision Date: 20 March 2020
• Docket Number: No. 17-12274 t11,17-12274 t11
• Citation: 615 B.R. 488
• Parties: IN RE: Victor P. KEARNEY, Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

615 B.R. 488

IN RE: Victor P. KEARNEY, Debtor.

No. 17-12274 t11

United States Bankruptcy Court, D. New Mexico.

Signed March 20, 2020

Jason Michael Cline, Jason Cline, LLC, Don F. Harris, Albuquerque, NM, Debbie E. Green, Marcus A. Helt, Frank Jennings Wright, Foley & Lardner LLP, David Benjamin Thomas, Reid Collins & Tsai LLP, Dallas, TX, for Debtor.

OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

On February 28, 2020, the Debtor filed a motion to convert his case to a chapter 7 case. Louis Abruzzo and Benjamin Abruzzo, as trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C (the "Abruzzo Trustees") objected. In their objection the Abruzzo Trustees argued, inter alia, that if the case is converted it should be immediately reconverted to chapter 11. Before the Court is Debtor's motion to strike the objection to conversion and the motion for reconversion because the Abruzzo Trustees lack standing, are not parties in interest entitled to appear and be heard under § 1109,¹ and may not seek affirmative relief under § 706(b).

As set out below, the Court concludes that the Abruzzo Trustees, far from being mere kibitzers in this contested matter, have the strongest economic and other interests in the outcome of the motion and must certainly be allowed to object, argue, present evidence, and otherwise participate. The Court will deny the motion to strike.

I. FACTS

For the purpose of ruling on the Motion, the Court finds:²

Debtor is a life beneficiary of two trusts—the Mary Pat Abruzzo Kearney Testamentary Trusts B and C (the "Trusts"). The Abruzzo Trustees are residual beneficiaries of the Trusts.

In 2013, Debtor sued the Abruzzo Trustees in state court, alleging that they breached their fiduciary duties to him in administering the Trusts. The Abruzzo Trustees filed counterclaims against Debtor for breach of fiduciary duty.³ Debtor's claims were tried to a jury in 2015, but the state court entered a directed verdict against him. The state court found that the Abruzzo Trustees were the prevailing parties on all issues at trial and awarded the Abruzzo Trustees attorneys' fees and costs pursuant to NMSA 1978, § 46A-10-1004. Debtor subsequently resigned as co-trustee of the Trusts.

In 2017 the state court tried the Abruzzo Trustees' counterclaims and found in favor of, and awarded attorneys' fees to, the Abruzzo Trustees.

Before the final state court hearing, on September 1, 2017, Debtor filed this chapter 11 case. The Abruzzo Trustees and the minor remainder beneficiaries filed proofs of claims based on the attorneys' fees and costs awarded in the state court action, stating that the claims were contingent on whether the state court ruled that the fees and expenses awarded should be paid from the Trusts' gross income. Claims 28-2, 29-1, 30-1, 31-1, 32-1.

The U.S. Trustee in Debtor's bankruptcy case appointed a committee of unsecured creditors (the "UCC") to represent Debtor's unsecured creditors. The UCC proposed a reorganization plan (the "UCC Plan") which was confirmed on February 28, 2019 (the "Confirmation Order"). Docs. 536, 846. Debtor appealed. The appeal currently is before the Tenth Circuit Court of Appeals.

In essence, the UCC Plan is the result of lengthy negotiations among the UCC, the Abruzzo Trustees, and Alvarado Realty Company ("ARCO").⁴ Under the proposed deal, ARCO would buy from the Abruzzo Trusts all of their ARCO stock for $12,571,799. The Trusts would then pay $3,000,000 to the estate in exchange for, inter alia, a release of all estate claims against ARCO, the Trusts, the Abruzzo Trustees, and related parties (the "Abruzzo/ARCO Parties"). The $3,000,000 payment would fund the UCC plan and be used to pay creditors. The state court approved the arrangement after hotly contested litigation.

The UCC Plan provides that the Abruzzo Trustees' claims shall not receive any distributions under the plan." Doc. 536 at 6–7, 32. However, the UCC Plan provides for a broad release of estate claims against the Abruzzo/ARCO parties. Doc. 536 at 32.

After the Court confirmed the plan the Abruzzo Trustees asked the state court to rule that the damages and attorneys' fees awarded to them in the state court litigation were expenses of the Trusts. Doc. 951. On September 10, 2019, the state court granted their request and ordered that "[a]ttorneys' fees and costs awarded by this [c]ourt, or that may be awarded in the future are recoverable Trust expenses and not amounts owed by [Debtor] ...." Doc. 951. This ruling may mean that the Abruzzo Trustees do not have claims against the estate.

On February 28, 2020, the Debtor filed his motion to convert his chapter 11 bankruptcy case to a chapter 7 liquidation case pursuant to § 1112(a). Doc. 1030. On March 9, 2020, the Abruzzo Trustees filed their objection. Doc. 1037. The objection asks the Court to deny the motion to convert or, if the Court grants the motion, to immediately reconvert the case back to Chapter 11. Doc. 1037.

II. DISCUSSION

A. Article III Standing.

Article III of the United States Constitution restricts federal court adjudication to actual cases or controversies. State of Utah v. Babbitt , 137 F.3d 1193, 1201 (10th Cir. 1998). To satisfy Article III's standing requirements, a plaintiff must show an injury in fact, causation, and redressability. Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc. , 528 U.S. 167, 180–81, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000) (citing Lujan v. Defenders of Wildlife , 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992) ). "To establish injury in fact, a plaintiff must show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’ " Bednar v. RCB Bank, et al. (In re Bednar ), No. AP 18-01096, 2019 WL 3928844, at *5 (10th Cir. BAP) (quoting Spokeo, Inc. v. Robins , ––– U.S. ––––, 136 S. Ct. 1540, 1548, 194 L.Ed.2d 635 (2016), as revised (May 24, 2016)).

B. Prudential Standing.

Prudential standing "embodies judicially self-imposed limits on the exercise of federal jurisdiction." The Wilderness Soc. v. Kane County, Utah , 632 F.3d 1162, 1168 (10th Cir. 2011). The prudential standing doctrine encompasses various limitations, including "the general prohibition on a litigant's raising another person's legal rights." Id. (quoting Allen v. Wright , 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984) ). "[T]he plaintiff generally must assert his own legal rights and interests and cannot rest his claim to relief on the legal rights or interests of third parties." Id. (quoting Warth v. Seldin , 422 U.S. 490, 499, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) ). Prudential standing is an issue of subject matter jurisdiction. Wilderness Soc. , 632 F.3d at 1168 ; Deutsche Bank Nat. Trust Co. v. F.D.I.C. , 717 F.3d 189, 194 n.4 (D.C. Cir. 2013) (prudential standing is threshold jurisdictional concept).

C. Statutory Standing.

Sometimes the right to bring a cause of action is conferred by statute. In those cases, prudential standing concepts, which are judge-made, take a back seat. See, e.g., Lexmark Intern. Inc. v. Static Control Components, Inc. , 572 U.S. 118, 134 S. Ct. 1377, 1387-88, 188 L.Ed.2d 392 (2014) ("[W]e do not ask whether in our judgment Congress should have authorized [plaintiff's] suit, but whether Congress in fact did so.").

D. The Abruzzo Trustees have Standing to Object to Debtor's Motion to Convert.

The Abruzzo Trustee clearly have standing to object to the motion to convert. First, Section 1109(b) provides:

[a] party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.

Section 1109(b)'s enumerated list of parties that may object is not exhaustive, Vermejo Park Corp. v. Kaiser Coal Corp., et al. (In re Kaiser Steel Corp. ), 998 F.2d 783, 788 (10th Cir. 1993), and the term "party in interest" is "generally given a broad though not ‘infinitely expansive’ construction." In re Sandia Tobacco Manufacturers, Inc. , No. 16-12335-J11, 2019 WL 4307561, at *4-5 (Bankr. D.N.M. July 27, 2019) (quoting Southern Blvd, Inc. v. Martin Paint Stores (In re Martin Paint Stores ), 207 B.R. 57, 61 (S.D.N.Y. 1997) ). The Court considers whether a party is a party in interest on a case by case basis. Sandia Tobacco Manufacturers, Inc., 2019 WL 4307561, at *4. A party is a party in interest if it "has a sufficient stake in the proceeding so as to require representation." Id. (quoting Kaiser Steel, 998 F.2d at 788 ). Generally, if the bankruptcy proceedings will have a direct effect on a party's pecuniary or legally protected interests, the party has standing under § 1109(b). See Nintendo Company, Ltd. v. Patten (In re Alpex Computer Corp. ), 71 F.3d 353, 356 (10th Cir. 1995) (stating that the term "party in interest" "is generally understood to include all persons whose pecuniary interests are, directly affected by the bankruptcy proceedings") (quoting Yadkin Valley Bank & Trust Co. v. McGee (In re Hutchinson), 5 F.3d 750, 756 (4th Cir.1993) ); In re Campbellton-Graceville Hosp. Corp. (Campbellton ), 593 B.R. 663, 667 (Bankr. N.D. Fla. 2018) ("To establish standing to object to confirmation, a party in interest under 11 U.S.C.§ 1109(b) must possess a legally protected interest affected by confirmation.").

Here, the Abruzzo Trustees argue that they "have a significant interest in the UCC Plan and any conversion of the case that would render the UCC Plan moot" because "[t]he [Abruzzo] Trustees are receiving releases [through the UCC Plan]." Doc. 1037. Citing Campbellton , Debtor argues in response that the Abruzzo Trustees' interest in the releases contained in the UCC Plan is not a legally protected or pecuniary interest. Doc. 1043.

In Campbellton , the objecting party's "only role ... was as a...